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Royal Bank of Scotland to investors: 'Sell everything'

Discussion in 'Sports and News' started by Dick Whitman, Jan 12, 2016.

  1. doctorquant

    doctorquant Well-Known Member

    Thanks. What very little I know about show biz isn't even enough to make me dangerous. I watch the intro to the movie and it says "Giganiticorp" and then "Edgy Name Pictures" and then "A John Doe Film" and I never know who did what.
  2. Pete

    Pete Well-Known Member

    Knowing more may well diminish your enjoyment. Because then you notice things like, if there are multiple screenwriters listed, whether they are linked by "an" or "&." Because they mean different things. ("and" means they worked separately, perhaps even years apart, such as if someone comes in to do a rewrite; an ampersand means they are a writing team and worked together) People fight over who gets credit and how because it makes a big difference in one's cut of residuals.

    Better to sit back, grab some popcorn, and enjoy!
    cranberry likes this.
  3. Buck

    Buck Well-Known Member

    How does a company aim to be the world's largest creator of entertainment when they cannot generate any net revenue?
  4. The Big Ragu

    The Big Ragu Moderator Staff Member

    Buck, The company generates a ton of revenue. More than $11 billion globally last year.

    The problem is free cash flow (what I think you were getting at?). In short, the capital expenditures required to grow their subscriber base (what the hype is about) and produce the content they are committed to, way exceeds the cash flow they are able to generate from operations.

    So it is a business that is living on debt. And it's not a one-time sort of thing. It has been burning through hundreds of millions of dollars of cash, quarter after quarter for the last several years. This past quarter, they burned through more than half a billion dollars.

    It's debt is junk. The only way a company with that kind of strategy would ever have been able to borrow that much, and still have plans to keep borrowing billions more, is in credit markets whose price discovery mechanism has been thoroughly destroyed. It's part and parcel of the same idiocy that led to the housing crisis last time around. Capital gets severely misallocated (and Netflix is nothing compared to the Zombie companies that don't even generate the revenue Netflix does, but have access to capital that may as well be being flushed down the toilet in the long term) because there are no honest price signals left.
  5. Buck

    Buck Well-Known Member

    Understood they have revenue.
    They have no net revenue, or profit.
  6. The Big Ragu

    The Big Ragu Moderator Staff Member

    Those are two different things. Revenues are sales. For a company like Netflix, there is little distinction between gross and net revenues, because of the type of service it sells. Things that would chip away at net revenues relative to gross sales are things like returns, rebates, discounts, etc.

    Profits, or your income, are self explanatory. It's how much you have left over after your costs of doing business.

    And actually, Netflix is profitable. It earned $559 million last year.
  7. Buck

    Buck Well-Known Member

    Was that their profit or their taxable income?
    Their profit is revenue minus cost of goods sold and operating expense.
    If they spend $1 billion on content and show $559 million in taxable income, they're still not profitable, even though their one year debt service is less that $1b.
  8. The Big Ragu

    The Big Ragu Moderator Staff Member

    When you look at an income statement, profits / income are a function of the company's business operations.

    Free cash flow is the measure you are getting at. It subtracts capital expenditures from operating cash flow. If that is a negative number, it means the company is burning through cash (which is the case for Netflix). That usually means large capital expenditures, which don't translate to the company losing money (i.e. not being profitable). It can mean you are investing for the future, with a plan to realize a return on that investment. For example, you might have a company that wants to build a huge new facility because they see the opportunity to quadruple their business. That expenditure, and how you fund it, has nothing to do with he company's current profitability. Of course, you still need to find that cash to make that capital expenditure. In the case of Netflix and its CapX, it has borrowed billions of dollars in the credit markets. But you can also generate cash in lots of other ways, for example, by selling equity in your company, selling assets, etc
  9. doctorquant

    doctorquant Well-Known Member

    And I would assume that a $1B expenditure on content would be treated as a capital investment and would therefore be amortized over years ... what the horizon would be, however, I have no idea.
  10. Vombatus

    Vombatus Well-Known Member

  11. britwrit

    britwrit Well-Known Member

    I honestly don't know much about the film business now. Back in the day, though - ten years ago, when I wrote a series of truly awful never-came-close-to-sold screenplays - the studios had this down to an art.

    For a film, they'd get money off the foreign market, the airlines, cable, the networks, dvds, and all the sub-markets. Basically, they got to sell the same product over and over again. With Netflix originals, they're already starting way down stream. Why buy one of their movies when it's already up on the service?
  12. The Big Ragu

    The Big Ragu Moderator Staff Member

    Yeah, I don't know a lot about the content business either. Which is why I haven't had much to say about Netflix's strategy -- I'll leave that to Pete, and what he said sounds about right to my sensibilities.

    Your post sounds about right to me, too. I don't know how much of a revenue stream their content is giving them to create gifts that keep on giving. I guess I'd look at HBO as a guide, for example, to see how much have they been able to monetize the Sopranos or Entourage or
    some of the original movies?

    I do know how to read financials, though, and I am pretty good at putting them into context. Which is why that is what I have concentrated on. And I try to value assets with a long-term eye. The things I know about this company: 1) They are racking up a staggering amount of debt to pursue their strategy. 2) Only capital markets for which price discovery was long ago destroyed are making that possible. And yeah that aggravates me, because we all pay a heavy price for that, along the way and when it ends with a credit crisis. 3) And then there is a whole separate issue of the spillover effects of all of that debt and margin at the heart of why Netflix can do it. It has created equity valuations almost across the board that are in nutso territory. Even if you think that Netflix is on the right track, put into any historical context, the earnings you are buying when you buy Netflix stock are well beyond just "overpriced." Of course, this time can be different (isn't it always until it isn't?), and maybe there isn't going to be a serious reversion to the mean (and when things have gotten like this in the past, the reversion wasn't just to the mean, it always overshoots far to the downside first).
    Last edited: Jan 25, 2018
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